Review Outline in Obligations Contracts by Atty. Aliakhbar a. Jumrani

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REVIEWER IN OBLIGATIONS AND CONTRACTS

Prof. Aliakhbar A. Jumrani PART I – OBLIGATIONS OBLIGATIONS I. OBLIGATIONS

A. Definition, Elements and Sources of Obligation (Art. 1156- 11 62) 1. Definition  

It is a juridical necessity to give, to do or n ot to do. It is a juridical relation whereby a person (called the creditor) may demand from another (called the debtor) the observance of a determinative conduct (the giving, doing or not doing), and in case of breach, may demand satisfaction from the assets of the latter.

2. Elements of an obligation 

Juridical or legal tie

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Active subject (obligee or creditor)

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Passive subject (obligor or debtor)

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Fact, prestation or service constituting the object of the obligation

3. Sources of an obligation 

Law

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Contracts

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Quasi-contracts

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Delicts

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Quasi-delicts

Notes: 1. Right vs. Obligation. Obligation . A right is a claim or title to an interest in anything whatsoever that is enforceable by law. An obligation is defined in the Civil Code as a juridical juridical necessity to give, to do or not to do. For every right enjoyed enjoyed by any person, there is a corresponding obligation on the part of another person to respect such right. x x x An obligation imposed on a person, and the corresponding right granted to another, must be rooted in at least one of the five sources of obligations. ( Makati Makati Stock Stoc k Exchange vs. Campos, G.R. No. 138814, April 16, 2009) 2009) 4. The concept of prestation 

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It is the object of an obligation, and it is the conduct required by the parties to do or not to do, or to give. The failure of one of the parties to comply with its reciprocal prestation allows the wronged party to seek the remedy of Article 1191. The wronged party is entitled to rescission or resolution under Article 1191, and even the payment of damages. It is a principal action precisely because it is a violation of the original reciprocal prestation. prestation.

Review Outline in Obligations & Contracts by Prof. Aliakhbar A. Jumrani for Jurists Bar Review Center™. All rights reserved 2017 by Jurists Review Center Inc. Unauthorized reproduction, use, or dissemination is strictly prohibited and shall be prosecuted to the full extent of the law, including administrative complaints with the Office of the Bar Confidant, Supreme Court. Page 1 of 20

B. Nature and Effect of Obligations (Art. 1163-1178) 1. Personal vs. Real 

The obligation to do or not to do is called a ―personal obligation‖

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The obligation to give something is called a ―real obligation‖

2. Diligence vs. Negligence 

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Negligence is defined as the failure to observe for the protection of the interests of another person that degree of care, precaution, and vigilance which the circumstances justly demand, whereby such other person suffers injury. Negligence is the omission of that diligence required by the nature of the obligation and corresponds to the circumstances of the persons, of th e time and of the place. The diligence required: i. depends on the nature of the obligation ii. must correspond to the circumstances of the persons, o f the time and of the place

3. Default or delay  

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Delay is the non-fulfillment of the obligation with respect to time. It is used synonymously with default. In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially and extrajudicially. There is delay or default only after a demand, judicial or extrajudicial, is made, except: i. When the obligation or the law expressly so declares; ii. When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or iii. When the demand would be useless, as when the obligor has rendered it beyond his power to perform

4. Fraud 

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Exists when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to (Art. 1338, CC). This kind of fraud is called dolo causante which causante which is a cause for the nullity of the contract and indemnification of damages. The other kind of fraud is called dolo incidente or incidente or incidental fraud which is referred to in Article 1344, CC and which is not serious in character and without which the other party would still have entered into into the contract. Usually, this fraud is committed in the performance of the contract. This may not serve as a basis to annul the contract but the party committing incidental fraud is liable for for damages. The distinction between fraud as a ground for rendering a contract voidable or as basis for an award of damages is provided in Article Article 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. Incidental fraud only obliges the person employing it to pay damages. Note, however, the following:


Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former’s special knowledge. Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. Art. 1343. Misrepresentation made in good faith is not fraudulent b ut may constitute error. 5. Fortuitous event 

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Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same. Elements: i. the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be indepe ndent of human will; ii. it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; iii. the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and iv. the obligor must be free from any participation in the aggravation of the injury or loss. It has been held that an act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse consequences of such a loss. One's negligence may have concurred with an act of God in producing damage and injury to another; nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not exempt one from liability. When the effect is found to be partly the result of a person's participation – whether by active intervention, neglect or failure to act – the whole occurrence is humanized and removed from the rules applicable to acts of God. (Sicam vs. Jorge, G.R. No. 159617, August 8, 2007)

C. Different Kinds of Obligations (Art. 1179-1230) 1. Pure and conditional obligations 

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Pure obligations are those whose effectivity or extinguishment does not depend upon the fulfillment or non-fulfillment of a condition or upon the expiration of a term or period. Conditional obligations are those whose effectivity depends upon the fulfillment or nonfulfillment of a future and uncertain fact or event. Suspensive condition is a condition the fulfillment of which gives rise to an obligation of the party in whose favor the condition is created. For example, full payment of the purchase price by the buyer in a contract to sell gives rise to the obligation of the seller to convey title to the property. i. Note that in a conditional obligation to give, once the condition has been fulfilled, the effects thereof shall retroact to the day of the constitution of the obligation,


unless the obligation imposes reciprocal prestations, in which case the fruits and interest shall be deemed mutually compensated. (Art. 1187, CC) ii. Note, however, that before the fulfillment of the conditional obligation to give, any benefit or improvement on the thing shall be for the creditor and may be appropriated by him, and any loss without the fault of the debtor shall also be borne by the creditor (Art. 1189, CC) 

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Resolutory condition is one which extinguishes rights and obligations already existing. For example, in a pacto de retro sale, the repurchase by the previous owner extinguishes the transaction and the right of the buyer/present owner to the property. i. Note that before the fulfillment of the condition, the right which the creditor has already acquired by virtue of the obligation is subject to a threat of extinction. ii. Upon fulfillment of the condition, the parties shall return to each other what they received. A potestative condition depends upon the exclusive will of one of the parties. Under Art. 1182, CC, it is considered void. i. Note that where the so-called "potestative condition" is imposed not on the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the obligation itself. (Catungal vs. Rodriguez, G.R. No. 146839, March 23, 2011)

2. Obligations with a Period 

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A "period" has been defined "as a space of time which has an influence on obligation as a result of a juridical act, and either suspends their demandableness or produces their extinguishment." Obligations with a period are those whose consequences are subjected in one way or another to the expiration of said period or term. Note the following under Art. 1193, CC: i. Obligations depending on the arrival or happening of a day certain shall be demandable only when that day comes; ii. Obligations with a resolutory period takes effect at once, but terminate upon arrival of the day certain; iii. A day certain is understood to be that which must necessarily come, although it may not be known when. However, if the uncertainty consists in WHETHER the day will come or not, the obligation is conditional and it shall be regulated by the rules on conditional obligations. A potestative condition (Art. 1182, CC) is distinguished from a period the duration of which is dependent upon the will of the debtor (Art. 1197, CC) in that, the former is void while the latter is valid. The court may be asked to fix the period in the latter. A period is presumed to have been established for the benefit of both creditor and debtor. This principle is applied in renewal of leases. It was held that the period of the lease contract is deemed to have been set for the benefit of both parties. Its renewal may be authorized only upon their mutual agreement or at their joint will. Its continuance, effectivity or fulfillment cannot be made to depend exclusively upon the free and uncontrolled choice of just one party. While the lessee has the option to continue or to stop paying the rentals, the lessor cannot be completely deprived of any say on the matter. Absent any contrary stipulation in a reciprocal contract, the period of lease is deemed to be for the benefit of both parties. (LL and Co. vs. Chao Chun, G.R. No. 142378, March 7, 2002)


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When a debtor loses the right to makes use of the period: i. When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt; ii. When he does not furnish to the creditor the guaranties or securities which he has promised; iii. When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; iv. When the debtor violates any undertaking, in consideration of which the creditor agreed to the period; v. When the debtor attempts to abscond.

3. Alternative Obligations 

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In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient, determined by the choice of the debtor who generally has the right of election. The right of election is extinguished when the party who may exercise that option categorically and unequivocally makes his or her choice known. The choice of the debtor must also be communicated to the creditor who must receive notice of it since: The object of this notice is to give the creditor . . . opportunity to express his consent, or to impugn the election made by the debtor, and only after said notice shall the election take legal effect when consented by the creditor, or if impugned by the latter, when declared proper by a competent court. Related to alternative obligations (but not quite) is a facultative obligation. Art. 1206, CC, provides that when only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative.

4. Joint and Solidary Obligations 

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Obligations may be classified as either joint or solidary. "Joint" or "jointly" or "conjoint" means mancum or mancomunada or pro rata obligation; on the other hand, "solidary obligations" may be used interchangeably with "joint and several" or "several." In a "joint" obligation, each obligor answers only for a part of the whole liability; in a "solidary" or "joint and several" obligation, the relationship between the active and the passive subjects is so close that each of them must comply with or demand the fulfillment of the whole obligation. Obligations are generally considered joint, except when otherwise expressly stated or when the law or the nature of the obligation requires solidarity. (Art. 1207, CC) Examples of solidary liability created by law: i. Liability for quasi-delicts (Malayan Insurance vs. Court of Appeals, L-36413, September 26, 1988) ii. Liability of co-principals in a contract of agenc y (Art. 1915, CC) iii. Liability of partners and the partnership in wrongful acts committed against third persons (Art. 1822 and 1823, CC) iv. Corporate officers are solidarily liable with the corporation for the illegal termination of services of employees IF they acted with malice or bad faith. (Polymer vs. Salamuding, G.R. No. 185160, July 24, 2013) In joint divisible obligations, each creditor can demand for the payment of his proportionate share of the credit, while each debtor can be held liable only for the payment of his proportionate share of the debt.


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In joint indivisible obligations, if there are two or more debtors, the fulfillment of or compliance with the obligation requires the concurrence of all the debtors, although each for his own share. Consequently, the obligations can be enforced only by proceeding against all of the debtors. Meanwhile, if there are two or more creditors, the concurrence or collective act of all the creditors, although each for his own share, is also necessary for the enforcement of the obligation. Effect of solidary obligation i. In active solidarity or where there is solidarity of creditors, each creditor is empowered to exercise against the debtor not only the rights which correspond to him, but also all the rights which correspond to the other creditors with the consequent obligation to render an accounting of his acts to such creditors. ii. In passive solidarity or where there is solidarity of debtors, each debtor is liable for the payment of the entire obligation, with the consequent right to demand reimbursement from the others for their corresponding shares once payment has been made. iii. A solidary creditor cannot assign his rights without the consent of the others. iv. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, subject to the following: 1. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt has been totally paid by anyone of them before the remission was effected. (Art. 1219, CC)

5. Divisible and Indivisible Obligations 

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The creditor cannot be compelled partially to receive the prestation in which the obligation consists; neither may the debtor be required to make partial payments. Exceptions: i. When the obligation expressly stipulates the contrary; ii. When the different prestations constituting the objects of the obligation are subject to different terms and conditions; iii. When the obligation is in part liquidated and in part unliquidated. Case in point: mortgage. Every portion of the property mortgaged is answerable for the whole obligation as soon as the latter falls due. The mortgagor cannot opt, much less compel the mortgagee, to apply any payment made by him on a specific portion of the mortgaged property to effect release. Neither may the mortgagee apply payments made to it on, and consequently release, a portion of the mortgaged property and effect foreclosure on the rest. (PNB vs. Amores, L-54551, Nov ember 9, 1987)

6. Obligations with a Penal Clause 

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The penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if: i. The obligor refuses to pay the penalty; ii. The obligor is guilty of fraud in the fulfillment of the ob ligation. (art. 1226, CC) The penalty is generally undertaken to insure performance and works as either, or both, punishment and reparation. It is an exception to the general rules on recovery of losses and damages.


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A penal clause must be specifically set forth in the obligation. (Rivera vs. Spouses Chua, G.R. No. 184458, January 14, 2015)

D. Extinguishment of Obligations (Art. 1231-1304) 1. Payment or Performance 

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Payment is a mode of extinguishing obligations and it means not only the delivery of money but also the performance, in any other manner, of an obligation. (Art. 1231, CC) ―Integrity of payment‖ means that the thing or service in which the obligation consists has been completely delivered or rendered. ―Identity of payment‖ means that the very thing, service or forbearance, as the object of prestation, must be performed or observed. Generally, a creditor cannot be compelled to receive a different thing. (Art. 1244, CC) Acceptance of partial payment or performance, without protest or objection, renders the obligation fully complied with. (Art. 1235, CC). i. Note, however, that the word ―accept‖ as used in Art. 1235, CC, means to ―take as satisfactory or sufficient, or agree to an incomplete or irregular performance‖. The mere ―receipt‖ of a partial payment is not equivalent to the required acceptance of performance as would extinguish the whole obligation. (De Castro vs. Court of Appeals, G.R. No. 115838, July 18, 2002) Payment may be made by the debtor himself or his legal representative. A creditor may not accept payment from a third person, except: i. When made by a third person who has an interest in the fulfillment of the obligation; and ii. When there is a stipulation to the effect that a third person may pay the obligation. Pursuant to Arts. 1236 and 1237, CC, if a third person pays for the debtor’s obligation, the presumption is that the latter is indebted to the former for such amount that has been paid. i. However, this is merely a presumption. By virtue of the parties’ freedom to contract, the parties could stipulate otherwise and thus, there is a possibility that such payment was purely out of generosity or that there was a mutual agreement between them. But such mutual agreement, being an exception to presumed course of events as laid down by Art. 1236 and 1237, must be adequately proven. (Carandang vs. De Guzman, G.R. No. 160347, November 29, 2006) Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest or any person authorized to receive it. Payment to a third person is valid, provided: i. It has redounded to the benefit of the creditor; ii. The third person is in possession of the credit in good faith (Art. 1240, CC) The obligation to pay money should generally be made in that which the law recognizes as money when the payment is to be made. That which the law allows to be received in or as payment is called legal tender. However, the parties may stipulate that payment may be made in a currency other than legal tender pursuant to Section 1 of RA 8183, to wit: ―x x x All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment.‖


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The delivery of promissory notes payable to order, or bills of exchange, or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. (Art. 1249, CC) i. This rule is not applicable in the exercise of a right, e.g. the right of redemption. In Fortunado vs. Court of Appeals (196 SCR A 269 [1991]), it was held that ―a check may be used for the exercise of the right of redemption, the same being a right and not an obligation. The tender of a check is sufficient to compel redemption but is not in itself a payment that relieves the redemptioner from his liability to pay the redemption price.‖

2. Application of Payments 

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The designation of the debt to which payment must be applied when the debtor has several obligations of the same kind in favor of the same creditor. Requisites: i. There must only be one debtor and one creditor ii. There must be two or more debts of the same kind iii. All of the debts must be due; iv. Amount paid by the debtor must not be sufficient to cover the total amount of all the debts. The debtor’s right to apply payment has been considered merely directory and not mandatory. The creditor may apply payments when the debtor does not elect to do so or when there is an agreement to that effect. (Premiere Development Bank vs. Central Surety, G.R. No. 176246, February 13, 2009) If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (Art. 1253, CC) To hold that bank debtors should not pay interest on their loans would be anathema to the nature of any bank’s business. The charging of interest for loans forms a very essential and fundamental element of the banking business. In fact, it may be considered to be the very core of the banking’s existence or being. (Calina vs. Development Bank of the Philippines, G.R. No. 159748, July 31, 2007)

3. Dation in payment 

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It is the transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. Requisites: i. Existence of a monetary obligation ii. Alienation to the creditor of a property b y the debtor with the consent of the former iii. Satisfaction of the money obligation of the debtor The transaction is governed by the law on sales.

4. Payment by Cession 

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This takes place when the debtor cedes or assigns his property to his creditors in payment of his debts. Compared to dation in payment, cession involves plurality of creditors, partial or complete insolvency of the debtor, universality of property ceded, and the release is only to the extent of the proceeds of the things ceded or assigned, unless there is a contrary stipulation.


5. Tender of Payment and Consignation 

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Tender of payment is the manifestation of the debtor to the creditor of his decision to comply immediately with his obligation. Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment. Requisites of a valid consignation: i. There was a debt due; ii. The consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due or because the title to the obligation has been lost; iii. Previous notice of the consignation had been given to the person interested in the performance of the obligation; iv. The amount due was placed at the disposal of the court; v. After the consignation had been made, the person interested was notified thereof. Tender of payment may be extrajudicial, while consignation is necessarily judicial. Tender and consignation, where validly made, produces the effect of payment and extinguishes the obligation. When prior tender of payment may be excused: (Art. 1256, CC) i. When the creditor is absent or unknown, or does not appear at the place of payment; ii. When he is incapacitated to receive the payment at the time it is due; iii. When, without just cause, he refuses to give a receipt; iv. When two or more persons claim the same right to collect. v. When the title of the obligation has been lost. The debtor may withdraw, as a matter of right, the thing or amount deposited on consignation in the following instances: (Art. 1260, CC) i. Before the creditor has accepted the consignation; or ii. Before a judicial declaration that the consignation has been properly made.

6. Loss of the Thing Due 

Loss as a mode of extinguishing an obligation to give depends on the thing involved. i. If the thing is determinate, the obligation is ex tinguished. Exceptions: 1. When by law, obligor is liable even for fortuitous event; 2. When by stipulation, obligor is liable even for fortuitous event; 3. When the nature of the obligation requires the assumption of risk; 4. When the loss of the thing is due partly to the fault of the debtor; 5. When the loss of the thing occurs after the debtor incurred delay; 6. When the debtor promised to deliver the same thing to two or more persons who do not have the same interest; and 7. When the debt of a certain and determinate thing proceeds from a criminal offense. ii. If the thing is generic or indeterminate, the obligation is NOT extinguished following the principle of genus nunquan perit or the genus of a thing can never perish. The obligation to pay money is generic; therefore, it is not excused by


fortuitous loss of any specific property of the debtor. (Gaisano Cagayan vs. Insurance Company of North America, G.R. No. 147839, June 8, 2006) 

In obligations to do, the obligation is extinguished when the prestation becomes legally or physically impossible without the fault of the obligor. (Art. 1266, CC) i. Under Art. 1267, CC, when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom , in whole or in part. The Supreme Court, however, explained that the parties to a contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands assistance to the debtor. Mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute a defense to an action for specific performance. (PNCC vs. Court of Appeals, G.R. No. 116896, May 5, 1997)

7. Condonation or Remission of the Debt 

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An act of pure liberality by virtue of which the obligee, without receiving any price or equivalent, renounces the enforcement of the obligation, as a result of which it is extinguished in its entirety or in that part or aspect of the same to which the remission refers. Requisites: i. It must be gratuitous; ii. It must be accepted by the debtor; iii. The obligation must be demandable. Note: i. It may become dation in payment when the creditor receives a thing different from that stipulated; ii. It may become novation when the object or principal conditions of the obligation should be changed; and iii. It may become a compromise when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor receives. (Dizon vs. Court of Tax Appeals, G.R. No. 140944, April 30, 2008)

8. Confusion or Merger of Rights 

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It is the merger of the characters of the creditor and the debtor in one and the same person by virtue of which the obligation is extinguished. Requisites: i. That the characters of creditor and debtor must be in the same person; ii. That it must take place in the person of either the principal creditor or the principal debtor iii. It must be complete and definite

9. Compensation 

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It is the extinguishment in the concurrent amount of the obligation of those persons who are reciprocally debtors and creditors of each other. Compensation may take place by operation of law (legal compensation), when two persons, in their own right, are creditors and debtors of each other; or may be voluntary or conventional, when the parties, who are mutually creditors and debtors agree to


compensate their respective obligations, even though not all the requisites for legal compensation are present. 

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Requisites of legal compensation: i. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; ii. That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; iii. That the two debts be due; iv. That they be liquidated and demandable; v. That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. Requisites of conventional compensation: i. That each of the parties can dispose of the credit he seeks to compensate; ii. That they agree to the mutual extinguishment of their credits.

10. Novation and Subrogation 

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It is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either: i. by changing the object or principal conditions; ii. by substituting another in place of the debtor; or iii. by subrogating a third person in the rights of the creditor Requisites: i. There must be a previous valid obligation; ii. There must be an agreement of the parties concerned to a new contract; iii. There must be the extinguishment of the old contract; and iv. There must be the validity of the new contract. Novation by substitution of debtor has two forms – substitution by expromision and substitution by delegacion. In expromision, the initiative for the change does not come from — and may even be made without the knowledge of — the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus consent of these three persons are necessary. In both cases, the original debtor must be released from the obligation; otherwise, there can be no valid novation. Furthermore, novation by substitution of debtor must always be made with the consent of the creditor. (Bognot vs. RRI Lending Corp., G.R. No. 180144, September 24, 2014) Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unmistakable. x x x The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. x x x The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation. x x x A restructuring agreement which does not state in clear terms that the first obligation is extinguished is not a novation. (Transpacific vs. Security Bank, G.R. No. 173565, May 8, 2009) Similarly, the execution of a real estate mortgage as security for the existing loan does not result in the extinguishment of the


original contract of loan because of novation. (Ligutan vs. Court of Appeals, G.R. No. 138677, February 12, 2002) 

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Subrogation is defined as the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. Types of subrogation: i. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts, e.g. in insurance payouts or indemnities where the insurer is subrogated to the rights of the insured against the third person who caused the damage or injury ii. Conventional subrogation is that which takes place by agreement of the parties. It is distinguished from assignment of credit in this wise:

In conventional subrogation, the debtor’s consent is necessary; in assignment, it is not required. Subrogation extinguishes the obligation and gives rise to a new one; assignment refers to the same right which passes from one person to another. The nullity of an old obligation may be cured by subrogation, such that a new obligation will be perfectly valid; but the nullity of an obligation is not remedied by the assignment of the creditor’s right to another. (Licaros vs. Gatmaitan, G.R. No. 142838, August 9, 2001)

PART II – CONTRACTS II. CONTRACTS

A. General Considerations 1. Definition a. It is a meeting of the minds, with respect to the other, to give something or to render some service. 2. Elements a. Consent of the contracting parties b. Object certain which is the subject matter of the contract c. Cause of the obligation which is established 3. Types of contracts (real, consensual, solemn) a. Real contract – perfected only upon the delivery of the object of the contract. (e.g. contract of loan) b. Consensual contract – perfected by mere consent, where no particular form is required for its validity. (e.g. contract of sale) c. Solemn contract – a contract for which the law itself requires that it be in some particular form (writing) in order to make it valid and enforceable. (e.g. donation of immovable property) 4. Characteristics i. Relativity


i. Contracts are only valid between parties, their assigns and heirs. ii. Contracts can only bind the parties who entered into it, and cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof. (Philippine National Bank vs. Tan Dee, G.R. No. 182128, February 19, 2014) iii. A stipulation pour autrui is a provision in favor of a third person not a party to the contract. Pursuant thereto, a third person is allowed to avail himself of a benefit granted to him by the terms of the contract, provided that the contracting parties have clearly and deliberately conferred a favor upon such person. Requisites: 1. The stipulation must be a part, not the whole of the contract; 2. The contracting parties must have clearly and deliberately conferred a favor upon a third person; 3. The third person must have communicated his acceptance; and 4. Neither of the contracting parties bears the legal representation of the third person. ii.

Obligatoriness i. Obligations arising from contracts have the force of law between the parties and should be complied with in good faith.

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Consensuality i. When perfected by mere consent, from that moment, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all consequences which, according to their nature, may be in keeping with good faith, usage and law.

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Mutuality i. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

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Autonomy i. The parties are allowed to establish such stipulations, clauses, terms and conditions they may deem appropriate provided only that they are not contrary to law, morals, good customs, public order or public policy.

B. Consent a. Manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. b. Once there is concurrence between the offer and acceptance upon the subject matter, consideration and terms of payment, a contract is produced. c. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any sort from the proposal. A


qualified acceptance, or one that involves a new proposal, constitutes a counteroffer and is a rejection of the original offer. Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer annuls the offer. (ABS-CBN vs. Court of Appeals, G.R. No. 128690, January 21, 1999) d. A counter-offer needs acceptance by the original offeror to give rise to a binding contract. (Pallatao vs. Court of Appeals, G.R. No. 131726, May 7, 2002) e. Vices of consent: i. Mistake ii. Intimidation iii. Violence iv. Undue influence v. Fraud f. A contract where consent is vitiated by any of the foregoing is voidable. C. Object of Contracts a. The thing, conduct or service subject matter of the contract. b. Requisites of a valid object: i. It must be within the commerce of man. ii. It must be licit or not contrary to law, morals, good customs, public order or public policy. iii. It must not be impossible. iv. It must be determinate as to its kind. D. Cause of Contracts a. The immediate, direct and most proximate reason which explains and justifies the creation of the obligation b. Requisites: i. The cause should be in existence at the time of the celebration of the contract. ii. The cause should be licit or lawful. iii. The cause should be true. c. Note: i. In onerous contracts, the cause is understood to be, for each contracting party, the prestation of promise of a thing or service by the other ii. In remuneratory contracts, the service or benefit which is remunerated iii. In contracts of pure beneficence, the mere liberality of the benefactor. E. Form of Contracts and Reformation of Instruments a. Contracts shall be obligatory in whatever form they have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or


enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. (Art. 1356, CC) b. The following must appear in a public instrument: i. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by Arts. 1403, no. 2 and 1405; ii. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; iii. The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; iv. The cession of actions or rights proceeding from an act appearing in a public document. c. Note: The necessity of a public document or contracts which transmit or extinguish real rights over immovable property, as mandated by Article 1358 of the Civil Code, is only for convenience; it is not for validity or enforceability. x x x the only effect of non-compliance with the provisions of Article 1358 of the Civil Code is that a party to such a contract embodied in a private document may be compelled to execute a public document. (Teoco vs. Metrobank, G.R. No. 162333, December 23, 2008) 

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When a party to a contract may ask for reformation of the instrument: i. When, there having been a meeting of the minds to the contract ii. Their true intention is not expressed in the instrument iii. By reason of mistake, fraud, inequitable conduct or accident Note that if mistake, fraud, inequitable conduct or accident has prevented a meeting of the minds, the proper remedy is not reformation of the instrument but annulment of the contract. Also, there shall be no reformation in the following cases: i. Simple donations inter vivos wherein no condition is imposed; ii. Wills; iii. When the real agreement is void.

F. Interpretation of Contracts a. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. (Art. 1370, CC) b. Plain meaning rule – The intent of the parties to an instrument is embodied in the writing itself, and when the words are clear and unambiguous the intent is to be discovered only from the express language of the agreement. Review Outline in Obligations & Contracts by Prof. Aliakhbar A. Jumrani for Jurists Bar Review Center™. All rights reserved 2017 by Jurists Review Center Inc. Unauthorized reproduction, use, or dissemination is strictly prohibited and shall be prosecuted to the full extent of the law, including administrative complaints with the Office of the Bar Confidant, Supreme Court. Page 15 of 20

c. Four corners rule – A principle which allows courts in some cases to search beneath the semantic surface for clues to meaning. A court’s purpose in examining a contract is to interpret the intent of the contracting parties, as objectively manifested by them. (Norton Resources vs. All Asia Bank, G.R. No. 162523, November 25, 2009) G. Defective Contracts 1. Void and Inexistent contracts a. Those where one of the essential requisites of a valid contract as provided for by Article 1318 of the Civil Code is totally wanting; b. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; c. Those which are absolutely simulated or fictitious; d. Those whose case or object did not exist at the time of the transaction; e. Those whose object is outside the commerce of men; f. Those which contemplate an impossible service; g. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; and h. Those expressly prohibited or declared void by law. i. Note: i. ii. iii. iv.

A void contract produces no legal effect. These contracts cannot be ratified. The right to set up the defense of illegality cannot be waived. The action or defense for the declaration of the inexistence of a contract does not prescribe. v. Courts leave parties to a void contract as they are, because they are in pari delicto or equally at fault. Neither party is entitled to legal protection. (Art. 1412, CC) 1. Exceptions that permit the return of that which may have been given under a void contract: a. Payment of usurious interest; b. Payment of money or delivery of property for an illegal purpose, where the party who paid or delivered repudiates the contract before the purpose has been accomplished, or before any damage has been caused to a third person; c. Payment or delivery made by an incapacitated person; d. Agreement or contract which is not illegal per se and the prohibition is designed to protect the plaintiff; e. Payment of any amount in excess of the maximum price of any article or commodity fixed by law; f. Contract whereby a laborer undertakes to work longer than the maximum number of hours fixed by law;


g. Contract whereby a laborer accepts a wage lower than the minimum wage fixed by law. 2. Voidable contracts a. Those where one of the parties is incapable of giving consent to a contract; b. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud c. Note: i. Article 1318 of the Civil Code states that no contract exists unless there is a concurrence of consent of the parties, object certain as subject matter, and cause of the obligation established. Article 1327 provides that insane or demented persons cannot give consent to a contract. But, if an insane or demented person does enter into a contract, the legal effect is that the contract is voidable or annullable as specifically provided in Article 1390. (Francisco vs. Herrera, G.R. No. 139982, November 21, 2002) d. The action to annul a contract may be lost due to: i. Prescription (4 years from the time the incapacity, violence, intimidation or undue influence ends, or from the time the mistake or fraud is discovered) ii. Ratification by the injured party 3. Rescissible contracts a. Contracts validly agreed upon but, by reason of lesion or economic prejudice, may be rescinded. b. The following contracts are rescissible: i. Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; ii. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; iii. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; iv. Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; v. All other contracts specially declared by law to be subject to rescission; vi. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected. c. Accion pauliana or an action to rescind contracts in fraud of creditors has the following requisites: i. The plaintiff asking for rescission has a credit prior to the alienation, although demandable later; ii. The debtor has made a subsequent contract conveying a patrimonial benefit to a third person; iii. The creditor has no other legal remedy to satisfy his claim;


iv. The act being impugned is fraudulent; and v. The third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. (Siguan vs. Lim, G.R. No. 134685, November 19, 1999) d. Notes on rescission: i. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest. ii. He who demands rescission must be able to return whatever he may be obliged to restore. iii. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. iv. The action for rescission must be commenced within four (4) years. 4. Unenforceable contracts a. Those entered into in the name of another by one without or acting in excess of authority; i. Without a proper board resolution to authorize an officer to execute a mortgage contract for petitioner corporation, the contract is unenforceable against the petitioner. However, personal liabilities may be incurred by directors who assented to such unauthorized act and by the person who contracted in excess of the limits of his or her authority without the corporation’s knowledge. (University of Mindanao vs. Bangko Sentral ng Pilipinas, G.R. No. 194964-65, January 11, 2016) b. Those where both parties are incapable of giving consent (note that the parties must be both incapable of giving consent; if only one of the parties is incapable of giving consent, the contract is voidable); and c. Those which do not comply with the Statute of Frauds. i. The purpose of the Statute of Frauds is to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses, by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged. ii. Agreements within the scope of the Statute of Frauds: 1. Agreements not to be performed within one year from the making thereof; 2. Special promise to answer for the debt, default or miscarriage of another; 3. Agreement in consideration of marriage other than a mutual promise to marry; 4. Agreement for the sale of goods, etc. at a price not less than P500.00; 5. Contracts of lease for a period longer than one year; 6. Agreements for the sale of real property or interest therein; and 7. Representation as to the credit of a third person.


d. The Statute of Frauds requires that the contracts/agreements be evidenced by some note, memorandum or writing, subscribed by the party charged or by his agent; otherwise, said contracts shall be unenforceable. e. The Statute of Frauds applies only to executory contracts, i.e., those where no performance has yet been made. It does not apply where the contract in question is completed, executed or partially consummated. (Orduna vs. Fuentebella, G.R. No. 176841, June 29, 2010) f. Also, the contracts supposedly covered by the Statute of Frauds become enforceable and are taken out of the ambit of the Statute of Frauds if they are ratified. i. Ratification means that one under no disability voluntarily adopts and gives sanction to some unauthorized act or defective proceeding, which without his sanction would not be binding on him. It is this voluntary choice, knowingly made, which amounts to a ratification of what was therefore unauthorized, and becomes the authorized act of the party so making the ratification. Once ratified, expressly or impliedly such as when the person knowingly received benefits from it, the contract is cleansed from its defects from the moment it was constituted, as it has a retroactive effect. (Neri vs. Yusop, G.R. No. 194366, October 10, 2012) III. NATURAL OBLIGATIONS

a. Based not on positive law but on equity and natural law; b. They do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. c. Examples of natural obligations under the Civil Code: 1. Performance after the civil obligation has prescribed; 2. Reimbursement of a third person for a debt that has prescribed; 3. Restitution by minor after annulment of contract; 4. Delivery my minor of money or fungible thing in fulfillment of obligation; 5. Performance after action to enforce civil obligation has failed; 6. Payment by heir of debt exceeding value of property inherited; and 7. Payment of legacy after a will has been declared void. IV. ESTOPPEL 

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Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. (Cortes vs. Court of Appeals, G.R. No. 121772, January 13, 2003) Kinds of Estoppel:  Estoppel in Pais  Elements (with respect to the party sought to be estopped):


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1. A clear conduct amounting to false representation or concealment of material facts or, at least, calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; 2. An intent or, at least, an expectation, that this conduct shall influence, or be acted upon by, the other party; and 3. The knowledge, actual or constructive by him of the real facts. Conditions (that must be satisfied by the party claiming the estoppel): 1. Lack of knowledge or of the means of knowledge of the truth as to the facts in question; 2. Reliance, in good faith, upon the conduct or statements of the party to be estopped; and 3. Action or inaction based thereon of such character as to change his position or status calculated to cause him injury or prejudice. (Shopper’s Paradise vs. Roque, G.R. No. 148775, January 13, 2004)

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Technical estoppel  The party to be estopped must knowingly have acted so as to mislead his adversary, and the adversary must have placed reliance on the action and acted as he would otherwise not have done.

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Estoppel by Judgment  Same as res judicata

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Laches It is the failure or neglect for an unreasonable and unexplained length of time to do that which by exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it. 


Review Outline in Obligations Contracts by Atty. Aliakhbar a. Jumrani

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